In a significant move aimed at boosting relief for road accident victims, Union Finance Minister Nirmala Sitharaman announced during the Union Budget 2026–27 presentation that interest awarded on motor accident compensation claims will be fully exempt from income tax for the financial year 2026-27.
This marks a key humanitarian measure in the Union Budget that directly benefits individuals and families dealing with the financial aftermath of road accidents.
Union Budget 2026: What the New Exemption Entails?
Under the newly proposed tax provision, any interest awarded by the Motor Accident Claims Tribunal (MACT) to a natural person that is, an individual claimant will no longer be treated as taxable income.
Further, the government has also removed the requirement for Tax Deducted at Source (TDS) on such interest payments. This ensures that claimants receive the full compensation amount without facing upfront tax deductions.
Previously, interest components included in MACT awards were often subject to income tax, with insurers or authorities deducting TDS before disbursing funds. Many victims — including those who were not even income tax assessees — had to navigate complex refund processes to recover the deducted amounts. With this change, that administrative burden and financial loss will be substantially reduced.
Rationale Behind the Change
The decision addresses long-standing concerns about the tax treatment of compensation awarded in motor accident cases. Over the years, judicial forums including the Supreme Court and various high courts have debated whether interest awarded in such claims should be taxable, given that the interest is intended to compensate for delays in payment rather than serve as income. The exemption now proposed aligns the tax treatment with the humanitarian intent of these awards.
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Union Budget 2026: Impact on Victims and Families
Road accidents result in significant financial strain for victims and their families, often due to medical expenses, rehabilitation costs, and loss of income.
By exempting MACT interest from tax and eliminating TDS, the Budget 2026 provision ensures that claimants receive full compensation without unnecessary fiscal erosion. Legal experts and victim rights groups have welcomed the move, describing it as a victim-centric reform that improves liquidity and accelerates access to funds that are meant for recovery and support.
While the exemption applies prospectively for claims arising after the measure comes into force, policymakers believe the reform will bring lasting relief and simplify tax compliance for individuals dealing with motor accident compensation cases.
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